UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2011
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File No. 000-30219
CHANCELLOR GROUP, INC.
(Exact name of Registrant as Specified in Its Charter)
Nevada 50-0024298
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
500 Taylor Street
Plaza Two - Suite 200
Amarillo, Texas 79105
(Address of principal executive offices) (Zip Code)
(806) 322-2731
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by checkmark if the registrant is not required to file reports to
Section 13 or 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
As of September 28, 2012 (the last business day of its most recently completed
third fiscal quarter), the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant was $509,515.
As of September 28, 2012, there were 69,560,030 shares of the registrant's
common stock ($0.001 par value) outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Parts Into Which Incorporated
EXPLANATORY NOTE
This Amendment No. 1 to the Annual Report on Form 10-K of Chancellor Group, Inc.
("Chancellor", the "Company" or "we") for the fiscal year ended December 31,
2011 is being filed solely to expand the Company's disclosures contained in the
original Form 10-K regarding certain litigation initiated against a subsidiary
of the Company and the Company's planned capital expenditures for the fiscal
year ended December 31, 2012. This Form 10-K/A amends and restates Part I, Item
3, Legal Proceedings, and Part II, Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations, respectively, with respect to
the original Form 10-K, in order to make such corrections.
Except as described above, no other changes have been made to the original Form
10-K, and this Form 10-K/A does not amend, update, or change the financial
statements or any other items or disclosures in the original Form 10-K. This
Form 10-K/A does not reflect events occurring after the filing of the original
Form 10-K or modify or update those disclosures, including any exhibits to the
original Form 10-K affected by subsequent events. Information not affected by
the changes described above is unchanged and reflects the disclosures made at
the time of the filing of the original Form 10-K on March 26, 2012. Accordingly,
this Form 10-K/A should be read in conjunction with our filings made with the
Securities and Exchange Commission subsequent to the filing of the original Form
10-K, including any amendments to those filings.
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ITEM 3. LEGAL PROCEEDINGS
Chancellor is from time to time involved in legal proceedings incidental to its
business and arising in the ordinary course. Chancellor's management does not
believe that any such proceedings will result in liability material to its
financial condition, results of operations or cash flow.
On March 31, 2011, Dennis Caldwell filed a lawsuit against Chancellor's
subsidiary, Gryphon Production Company, LLC, in the 223rd District Court of Gray
County, Texas, for an alleged breach of the April 1, 2007, purchase and sale
agreement between Gryphon and Caldwell Production Co., Inc. Caldwell contended
that Gryphon did not pay for the oil in the storage tanks in the April 2007
transaction. The plaintiff alleges breach of contract, conversion and fraud and
seeks damages of $451,998.54 as contract damages, pre-judgment and post-judgment
interest, exemplary damages, attorney fees, and court costs. Gryphon has denied
all allegations in the lawsuit, asserted affirmative defenses, and challenged
plaintiff's standing. Chancellor believes the lawsuit is without merit and
intends to vigorously defend it.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Throughout this report, we make statements that may be deemed "forward-looking"
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts, that address activities,
events, outcomes and other matters that Chancellor plans, expects, intends,
assumes, believes, budgets, predicts, forecasts, projects, estimates or
anticipates (and other similar expressions) will, should or may occur in the
future are forward-looking statements. These forward-looking statements are
based on management's current belief, based on currently available information,
as to the outcome and timing of future events. When considering forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this report.
We caution you that these forward-looking statements are subject to all of the
risks and uncertainties, many of which are beyond our control, incident to the
exploration for and development, production and sale of oil and gas. These risks
include, but are not limited to, commodity price volatility, inflation, lack of
availability of goods and services, environmental risks, operating risks,
regulatory changes, the uncertainty inherent in estimating proved oil and
natural gas reserves and in projecting future rates of production and timing of
development expenditures and other risks described herein, the effects of
existing or continued deterioration in economic conditions in the United States
or the markets in which we operate, and acts of war or terrorism inside the
United States or abroad.
BACKGROUND
In April 2007 we commenced operations with what were 84 actually producing wells
in Gray and Carson counties, Texas. On July 22, 2008, we had entered into an
Agreement, effective as of June 1, 2008, with Legacy Reserves Operating LP
("Legacy") for the sale of our oil and gas wells in Carson County, Texas,
representing for approximately 84% of our oil and gas production at that time.
In 2010, the Company acquired three additional properties in Hutchinson County,
including approximately 16 wells, for a purchase price of approximately
$150,000. In 2011, the Company continued our operational and restoration
programs and the production capacity from our 67 actively producing wells in
Gray and Hutchinson counties. Pursuant to the terms of the Purchase and Sale
Agreement dated October 18, 2011, LCB purchased all of Gryphon's right, title
and interest in certain leases, wells, equipment, contracts, data and other
designated property. The assets sold to LCB constituted approximately 82% of the
company's consolidated assets as of September 30, 2011 and contributed
approximately 95% and 77%, respectively, of the Company's consolidated gross
revenues and total expenses for the nine months then ended. Under the terms of
the Purchase and Sale Agreement, LCB paid Gryphon $2,050,000 in cash, subject to
certain adjustments as set forth in the Purchase and Sale Agreement.
The Company has continued to maintain a total of four (4) producing wells and
one (1) water disposal well. Gryphon will also retain an operator's license with
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the Texas Railroad Commission and continue to operate the Hood Leases itself.
The proceeds from the asset sale will be used to provide working capital to
Gryphon and for future corporate purposes including, but not limited to,
possible acquisitions and other corporate programs and purposes that have yet to
be identified.
Our common stock is quoted on the Over-The-Counter market and trades under the
symbol CHAG.OB. As of March 26, 2012, there were 68,560,030 shares of our common
stock issued and outstanding.
RESULTS OF OPERATIONS
Twelve Months Ended December 31, 2011 Compared to Twelve Months Ended December
31, 2010
PRODUCTION: During 2011, we produced and sold 7,794 barrels of oil and produced
and sold 6,546 mcf of gas, generating $733,268 in gross revenues net of
royalties paid, with a one month lag in receipt of revenues for the prior months
sales, as compared with 9,854 barrels of oil and 10,199 mcf of gas, generating
$834,084 in gross revenues net of royalties paid during 2010. We had 4 wells
actually producing oil and none producing gas at December 31, 2011 and had 67
wells actually producing oil and 2 producing gas at December 31, 2010. Pursuant
to the terms of the Purchase and Sale Agreement dated October 18, 2011, LCB
purchased all of Gryphon's right, title and interest in certain leases, wells,
equipment, contracts, data and other designated property. The assets sold to LCB
constituted approximately 82% of the Company's consolidated assets as of
September 30, 2011 and contributed approximately 95% and 77%, respectively, of
the Company's consolidated gross revenues and total expenses for the nine months
then ended. Under the terms of the Purchase and Sale Agreement, LCB paid Gryphon
$2,050,000 in cash, subject to certain adjustments as set forth in the Purchase
and Sale Agreement. The Company recognized a gain of approximately $414,000
related to the sale of assets to LCB.
The Company has continued to maintain a total of four (4) producing wells and
one (1) water disposal well. Gryphon will also retain an operator's license with
the Texas Railroad Commission and continue to operate the Hood Leases itself.
The proceeds from the asset sale will be used to provide working capital to
Gryphon and for future corporate purposes including, but not limited to,
possible acquisitions and other corporate programs and purposes that have yet to
be identified.
The following table summarizes our production volumes and average sales prices
for the years ended December 31:
2011 2010
-------- ---------
Production:
Oil Sales (Bbl) 7,794 9,854
Natural Gas Sales (Mcf) 6,546 10,199
Average Sales Price:
Oil, per Bbl $ 88.54 $ 75.64
Gas, per McF $ 6.57 $ 9.06
The decrease in net sales of both oil and natural gas during the year ended
December 31, 2011 (as compared to the year ended December 31, 2010) resulted in
part from the sale of substantially all of our producing wells effective
December 1, 2011 to LCB. The reduction in our production was offset in part by
higher oil prices in 2011. The decline in natural gas production was the result
of inclement weather in the first quarter of 2011 and down time due to repairs
and maintenance on gas compressor equipment.
DEPRECIATION AND AMORTIZATION: Expense recognized for depreciation and
amortization of property and equipment decreased $19,589, or approximately 7%,
in 2011 from 2010. This decrease was primarily attributable to the sale of
substantially all of our producing wells effective December 1, 2011 to LCB.
GENERAL AND ADMINISTRATIVE EXPENSES: During 2011, our general and administrative
expenses decreased $53,009, or approximately 9%, in 2011 from 2010. Significant
components of these expenses include salaries, professional fees, and insurance.
Salaries (included in both administrative expenses and operating costs)
decreased approximately 20% during 2011, primarily the result of staff
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reductions beginning in January 2011. Professional fees increased approximately
19% during 2011, primarily the result of increased consultation costs with third
parties. Insurance decreased approximately 16% during 2011.
OVERALL: The majority of the past year we continued with the ongoing production,
maintenance and enhancements of our producing wells in Gray and Hutchinson
counties. As a result of these efforts, along with continued increases in oil
prices during most of 2011, our gross revenues for 2011 are $733,268. Effective
December 1, 2011, pursuant to the terms of the Purchase and Sale Agreement dated
October 18, 2011, LCB purchased all of Gryphon's right, title and interest in
certain leases, wells, equipment, contracts, data and other designated property.
The assets sold to LCB constituted approximately 82% of the company's
consolidated assets as of September 30, 2011 and contributed approximately 95%
and 77%, respectively, of the Company's consolidated gross revenues and total
expenses for the nine months then ended. Under the terms of the Purchase and
Sale Agreement, LCB paid Gryphon $2,050,000 in cash, subject to certain
adjustments as set forth in the Purchase and Sale Agreement. The Company
recognized a gain of $414,710 on the sale of these assets to LCB. During 2011 we
were also able to reduce our direct lease and operating costs by approximately
$236,000, or 26% as compared to 2010. However, we again reported a net loss of
$341,241 during 2011, compared to a net loss of $943,233 reported for 2010.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW: The following table highlights certain information in relation to our
liquidity and capital resources at December 31:
2011 2010
---------- ----------
Working Capital $2,253,170 $ 774,409
Current Assets $2,424,020 $ 922,630
Current Liabilities $ 170,850 $ 148,221
Stockholders' Equity $2,284,463 $2,595,703
Our working capital at December 31, 2011 increased by $1,478,761, or
approximately 190%, from December 31, 2010, primarily from the sale of assets to
LCB. Current assets increased by $1,501,390, or approximately 162%, while
current liabilities increased $22,629, or approximately 15%, primarily as a
result of the timing of cash disbursements.
Our capital resources consist primarily of cash from operations and permanent
financing, in the form of capital contributions from our stockholders. As of
December 31, 2011 the Company had $2,336,776 of cash on hand, which includes
restricted cash of $250,000 held as collateral for a letter of credit issued to
the Railroad Commission of Texas as required for its oil and gas activities. Our
capital expenditures for fiscal year 2012, estimated to be approximately $15,000
to $20,000, consist of repair and maintenance of our four producing oil wells
and one water disposal well. We expect to pay these costs from cash on hand and
from operations.
CASH FLOW: Net cash generated during 2011 was $1,526,678, compared to net cash
used of $594,597 during 2010. The most significant factor causing the increase
in net cash flow during 2011 was the sale of assets to LCB on December 1, 2011,
which generated a net cash flow of $1,923,085.
Cash used for operations decreased by $6,559, or approximately 2%, during 2011,
compared to 2010.
Cash used for investing activities increased by $2,163,466, or approximately
840%, during 2011, compared to 2010, primarily due to the sale of assets to LCB
which generated a net cash flow of 1,923,085.
Cash provided by financing activities decreased by $48,750, or approximately
100% during 2011, compared to 2010, as there were not any issuances of common
stock for cash in 2011 compared to 2010.
EQUITY FINANCING: As of December 31, 2011, our stockholders have contributed
$3,566,013 in equity financing. We do not anticipate that significant equity
financing will take place in the foreseeable future.
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CONTRACTUAL OBLIGATIONS
On October 13, 2011, the Company entered into a consulting agreement for 500,000
shares of stock and $3,000. The agreement is for six months with an additional
200,000 shares and $3,000 payable monthly. The Company recognized $18,000 in
consulting fee expense in relation to the stock issued pursuant to this
agreement in 2011.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission (the "SEC") recently issued "FINANCIAL
REPORTING RELEASE NO. 60 CAUTIONARY ADVICE REGARDING DISCLOSURE ABOUT CRITICAL
ACCOUNTING POLICIES" ("FRR 60"), suggesting companies provide additional
disclosures, discussion and commentary on those accounting policies considered
most critical to its business and financial reporting requirements. FRR 60
considers an accounting policy to be critical if it is important to the
company's financial condition and results of operations, and requires
significant judgment and estimates on the part of management in the application
of the policy. For a summary of the Company's significant accounting policies,
including the critical accounting policies discussed below, please refer to the
accompanying notes to the financial statements provided in this Annual Report on
Form 10-K.
NATURAL GAS AND OIL PROPERTIES
In January 2010, the Financial Accounting Standards Board issued ASU 2010-03 to
align the oil and gas reserve estimation and disclosure requirements of
Extractive Industries -- Oil and Gas Topic of the Accounting Standards
Codification with the requirements in the SEC's final rule, "MODERNIZATION OF
THE OIL AND GAS REPORTING REQUIREMENTS". We implemented ASU 2010-03 as of
December 31, 2009. Key items in the new rules include changes to the pricing
used to estimate reserves and calculate the full cost ceiling limitation,
whereby a 12-month average price is used rather than a single day spot price,
the use of new technology for determining reserves, the ability to include
nontraditional resources in reserves and the ability to disclose probable and
possible reserves. Management has elected not to include probable and possible
reserves in its reserve studies and related disclosures. The process of
estimating quantities of oil and gas reserves is complex, requiring significant
decisions in the evaluation of all available geological, geophysical,
engineering and economic data. The data for a given field may also change
substantially over time as a result of numerous factors including, but not
limited to, additional development activity, evolving production history and
continual reassessment of the viability of production under varying economic
conditions. As a result, material revisions to existing reserve estimates may
occur from time to time. Although every reasonable effort is made to ensure that
reserve estimates reported represent the most accurate assessments possible, the
subjective decisions and variances in available data for various fields make
these estimates generally less precise than other estimates included in the
financial statement disclosures.
As of December 31, 2010, we had proved reserves of 1.888 bcfe at 2010 12-month
average prices of $7.56 per mcf and $75.73 per barrel before price differential
adjustments. As of December 31, 2011, we had proved reserves of .103 bcfe at
2011 12-month average prices of $89.74 per barrel before price differential
adjustments. This decrease in reserves is due primarily to sale of assets to LCB
for a gross sales price of $2,050,000.
INCOME TAXES
As part of the process of preparing the consolidated financial statements, we
are required to estimate federal and state income taxes in each of the
jurisdictions in which Chancellor operates. This process involves estimating the
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items, such as derivative instruments,
depreciation, depletion and amortization, and certain accrued liabilities for
tax and accounting purposes. These differences and our net operating loss
carry-forwards result in deferred tax assets and liabilities, which are included
in our consolidated balance sheet. We must then assess, using all available
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positive and negative evidence, the likelihood that the deferred tax assets will
be recovered from future taxable income. If we believe that recovery is not
likely, we must establish a valuation allowance. Generally, to the extent
Chancellor establishes a valuation allowance or increases or decreases this
allowance in a period, we must include an expense or reduction of expense within
the tax provision in the consolidated statement of operations.
Under accounting guidance for income taxes, an enterprise must use judgment in
considering the relative impact of negative and positive evidence. The weight
given to the potential effect of negative and positive evidence should be
commensurate with the extent to which it can be objectively verified. The more
negative evidence that exists (i) the more positive evidence is necessary and
(ii) the more difficult it is to support a conclusion that a valuation allowance
is not needed for some portion or all of the deferred tax asset. Among the more
significant types of evidence that we consider are:
* taxable income projections in future years;
* whether the carry-forward period is so brief that it would limit
realization of tax benefit;
* future sales and operating cost projections that will produce more than
enough taxable income to realize the deferred tax asset based on existing
sales prices and cost structures; and
* our earnings history exclusive of the loss that created the future
deductible amount coupled with evidence indicating that the loss is an
aberration rather than a continuing condition.
If (i) oil and natural gas prices were to decrease significantly below present
levels (and if such decreases were considered other than temporary), (ii)
exploration, drilling and operating costs were to increase significantly beyond
current levels, or (iii) we were confronted with any other significantly
negative evidence pertaining to our ability to realize our NOL carry-forwards
prior to their expiration, we may be required to provide a valuation allowance
against our deferred tax assets. As of December 31, 2011, a deferred tax asset
of $314,000 has been recognized but partially offset by a valuation allowance of
approximately $310,000 due to federal NOL carry-back and carry-forward
limitations.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet transactions, arrangements, obligations
(including contingent obligations), or other relationships of the Company with
unconsolidated entities or other persons that have, or may have, a material
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Chancellor Group, Inc.
(Registrant)
Date: October 1, 2012 By: /s/ Maxwell Grant
------------------------------------------
Maxwell Grant, Chief Executive Officer and
Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Maxwell Grant October 1, 2012
----------------------------------------
Maxwell Grant,
Chief Executive Officer,
Principal Financial Officer and Director
/s/ Dudley Muth October 1, 2012
----------------------------------------
Dudley Muth, Director
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EXHIBIT INDEX
Exhibit No.
-----------
31 Chief Executive Officer and Principal Financial Officer
Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 dated October 1, 2012. Filed Herewith. Chief Executive
Officer and Principal Financial Officer
32 Certificate pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated
October 1, 2012. Filed Herewith.